The cash crunch that followed the central government's demonetisation move must have compelled some of the retailers to accept digital payments, but there were many who preferred sluggish business to a disproportionate increase in the number of traceable transactions due to this fear.
It is common knowledge that all cash transactions are not billed and not every tax due - direct as well as indirect, is accounted for and paid by India's unorganised retail trade. Any move to successfully digitalise Indian economy must therefore begin with a measure to assuage this fear without compromising the government's efforts to arrest tax evasions of massive scale and size.
The committee of chief ministers headed by Andhra Pradesh chief minister N Chandra Babu Naidu, which submitted its interim report to Prime Minister Narendra Modi on January 23, has identified this problem, and rightly, suggested a pragmatic solution to build confidence among unorganised businesses in digital payments. It has stated that there should not be any retrospective taxation to merchants opting for digital transactions.
The next step, after confidence building measure, is to incentive such transactions. The committee has done that too. It wants non-income tax payers and small merchants to be given a subsidy of Rs 1,000 for purchasing smart phones. The committee has also recommended abolition of the Merchant Discount Rate charges (MDR) and putting a curb on large transactions.
The next step is to discourage cash transactions. Here, the committee wants a levy or banking cash transaction tax on Rs. 50,000 and above transactions. It also wants a cap on maximum allowable cash limit in all types of large transactions to enable all sections of the population to migrate to the digital payments.
The committee's advice to the government is to bring all government insurance, educational institutes, fertilisers, public distribution system and petroleum sectors within the ambit of digital payments.
A day later, the finance ministry has clarified that the panel's views are just recommendatory in nature, and the government will carefully examine the suggestions before adopting it.
Given the fact that the recommendations were not really out of world, but mostly practical observations, the government should not have any problem in implementing it. In fact, it should act quickly, if it is serious about its plans for a transition towards digital economy. Can it begin with Union Budget 2017-18?